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. 'BiLfiERilERG.

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Vouliagmeni, Greece
April 22-25, 1993
/ ........ ./ Ni8nci 'l'o pxRTlcii>AN'fs
Participants attend in a private capacity, irrespective of their official position.
Participants are expected to stay through the entire c o n f e r ~ n c e and to join in all of the.
conference programme (which begins Thursday before d_inrter)
The meetings do not formulate policies or reach conclusions, and no resolutions are .
submitted for discussion or vote.
The sole purpose of the debate is to have an exchange of views about the issues on the
agenda, from which participants are free to draw their own conclusions.
Fruitful discussions are enhanced by an atmo!>phere of mutual trust in which participants
can express themselves freely. All discussions are therefore private and off-the-record;
the press is excluded from the meetings.
A list of participants and the agenda will be made available to the press the day the
conference ends.
Participants are expected not to give interviews to the press during the meeting. A point
which should be strictly adqered to in contacts with the news media, is that no attribution
should be made to individ1:al participants of what was discussed during the meeting.
The report of the conference includes the names of all participants and opinions are
summarized; speakers are not referred to by name. This report is circulated only to
participants, former participants of the Bilderberg Meetings and sponsors.
Participants should plan to arrive at the Nafsika Astir Palace Hotel on Thursday, April
22. Drinks will be served from 19.00; dinner will be served from 20.00. Working sessions
start daily at 08.30 and end before dinner, with a recreation break on Saturday from
\lunch till 17.00.
o The closing session on Sunday will take place from 8.30 until 11.00. Lunch will be served
at 12.00 noon.
The meeting will be held at the Nafsika Astir Palace Hotel in Greece. The full address is:
Nafsika Astir Palace Hotel
on- 30 [1 J 8960 211
(() 30 [1] 8963 281
Telex 210712 ASPA GR
The Hotel has been reserved exclusively for the meeting and all activities will take place there.
Rooms, meals and wines will be provided free of charge to participants from dinner on
Thursday, April 22 till lunch on Sunday, April 25.
Personal charges, such as telecommunication, laundry, room service, etc. will be at
participants' own expense.
Participants are strongly urged not to bring personal staff. However, participants who must be
accompanied by personal staff should be aware that staff cannot attend sessions nor share meals
at participants' tables: a separate dining room will be provided.
~ Accompanying personal and security staff will be accommodated at their own expense.
It is emphasized that participants may not bring spouses to Bilderberg Meetings. Our staff is
prepared to assist spouses travelling with participants in finding suitable accommodation
On arrival participants will receive detailed information on the schedule and procedures of the
conference, lay-out of the site, seating arrangements in the conference room, the final list of
participants, and other supporting information.
The official language of the conference is English.
The Nafsika Astir Palace Hotel offers an outside swimming pool and tennis courts.
The Nafsika Astir Palace Hotel is about 12 km from Athens Airport. Participants are
expected to make their own travel arrangements to the reception point in Athens and
from this point to their next destinations. Transport will be provided by the host country
between the reception/departure point and the Nafsika Astir Palace Hotel.
. .
Participants arriving by commercial and private planes will be met at Athens airport by
hostesses who will show the Bilderberg symbol (similar to the Bilderberg luggage labels
enclosed). A participant who fails to make contact with a hostess should telephone the
Bilderberg Transportation Desk at the Nafsika Astir Palace Hotel:
'Z!' 30 [1 J 9657-002
({) 30 [1J9657-003
~ All participants are urged to attach the enclosed Bilderberg labels to all their luggage,
including their hand luggage.
To assure proper reception at points of arrival, timely transportation and smooth departure, ALL
participants are requested to fill in the enclosed travel advisory form and return it by fax to:
Bilderberg Meetings
The Netherlands
({) 31 [20] 624-4299
Other correspondence and faxes concerning the conference should be addressed to:
Mrs. Maja Banek
Executive Secretary, Bilderbergi Meetings
Herengracht 500 l
The Netherlands
'Z!' 31 [20] 625-0252
({) 31 [20] 624-4299
And from Monday, April 19, 1993 until the end of the meeting to:
Bilderberg Meetings
c/o Nafsika Astir Palace Hotel
166 71 Vouliagmeni
'Z!' 30 [1] 9657-000
({) 30 [1 J 9657-001
'Z!' = telephone
({) =fax
To ensure proper security control during the Conference all persons authorized to
enter the hotel have a special ID-card incorporating their photograph and with
borders in various colours to designate their function. Please wear your ID-card at all
times during the Conference; security officers will be on duty in the hotel and will
challenge anyone not wearing a badge. Please also take your badge with you if you
leave the grounds: when you return you will be asked to show your badge.
In the portfolio you will find:
Current list of participants
List with profiles of participants
General procedure for participating in plenary discussions
Floor plan of the N a ~ i k a Astir Palace Hotel
Alphabetical list of participants with addresses
Telephone instructions
Paper by Mr. Costa Carras
Participants are requested not to give interviews during the meeting, nor should any
reference be made, in post-conference interviews, to what an individual participant has
said during the meeting.
The Nafsika Astir Palace Hotel has been reserved exc1usive1y for this conference.
Signs guiding you to the Conference Rooms will be clearly posted in the corridors.
Members of the Bilderberg Secretariat
Mrs. Maja Banek, Executive Secretary (Banquet A, ext. 518)
Mrs. Ronnie Glattauer (Banquet A, ext. 529)
Miss Felicity Saunders (Banquet A, ext. 529)
Miss Marlieke de Vogel (Banquet A, ext. 528)
Mrs. Pauline Zonneveld (Banquet A, ext. 528)
Transportation Office
Mrs. Natassa Vassilaki (Banquet B, ext. 585)
Ms. Sophia Bacoula (Banquet B, e?ct. 584)
You will find instructions for making in-house, local, domestic, long-distance and
international calls in your portfolio.
Fax messages to be sent can be handed in at the Bilderberg Secretariat, Banquet A.
Incoming messages will be put on the tables in the Conference Room.
The fax number of the Nafsika Astir Palace Hotel is [30] 896-3281
Incoming mail will be delivered to you personally through the Secretariat.
A supply of local and foreign newspapers can be found in the corridor outside the
Conference Room after the morning sessions, and in the bar area in the evening.
A TV monitor room (shown on the ground floor plan) will be at the disposal of
personal staff.
For medical emergencies please dial "368" (Dr. Ktena ).
The Nafsika Astir Palace Hotel accepts travellers cheques and the following credit
cards: Access, American Express, Diners Club, Eurocard, Master Card and Visa.
Personal cheques are not accepted.
All meals will be served in the Jason Restaurant.
Breakfast will be served each day from 7:00 a.m. to 8:30 a.m. There are no fixed
seating arrangements.
Bar service is available in the Bar. Pre-dinner drinks will be provided by the host in
the Bar area.
Personal charges, such as teleppone calls, faxes, all drinks (except those served with
meals during the Conference and before dinner), recreation, laundry, and expenses
incurred prior to the dinner on Thursday, April 22 and after luncheon on Sunday,
April 25, will be on the participant's own account.
Cars will be available to take you to the airport of your departure. You will be
notified well in advance of the time you should be in the lobby for
Participants who have not yet informed Mrs. Vassilak:i (Transportation Office, Banquet
B, Ext. 585), of their departure time on Sunday are urgently requested to do so,
preferably by 5:00 p.m. on Friday.
Please note: Before leaving the Hotel, please identify your luggage so that it may be
transported with you in the same car. Unidentified luggage could be left behind or
Confirmation of or changes to your return fljghts should be made with the
Transportation Office (Banquet B, ext. 585).
Names and affiliations of participants will appear in the final Conference report.
Please advise the Executive Secretary, prior to your departure, of any changes or
corrections to your personal listing.
Vouliagmeni, Thursday April 22, 1993
The 41st Bilderberg Meeting will be held at the Nafsika Astir Palace Hotel, Vouliagmeni, Greece, April 22-25,
1993, to address the following subjects:
What Kind of Europe Will the U.S. Have to Deal With?
Cost of Indifference Toward the Former Soviet Union
U.S. Foreign Policy
U.S. Domestic Policy Concerns
Restoring Confidence in Leadership and Institutions
The Outlook for Japan's Economy
Prospects for Global Trade
Approximately 115 participants from North America and Western Europe will attend the discussions. The
meeting is private in order to encourage frank and open discussion.
Bilderberg takes its name from the Bilderberg Hotel in Oosterbeek, Holland where the first meeting took place
in May 1954. That meeting grew out of the concern on both sides of the Atlantic that Western Europe and
North America were not working together as closely as they should on matters of critical importance. It was felt
that regular, off-the-record discussions would contribute to a better understanding of the complex forces and
major trends affecting Western nations.
What is unique about Bilderberg as a forum is (1) the broad cross-section of leading citizens, in and out of
government, that are assembled for nearly three days of purely informal discussion about topics of current
concern especially in the fields of foreign affairs and the international economy, (2) the strong feeling among
participants that in view of the differing attitudes and experiences of the Western nations, there is a continuous,
clear need to develop an understanding in which these concerns can be accommodated, and (3) the privacy of
the meetings, which have no purpose other than to allow leading citizens to speak their minds openly and freely.
At the meetings, no resolutions are proposed, no votes taken, and no policy statements issued.
In short, Bilderberg is a flexible and infoqnal international leadership forum in which different viewpoints can
be expressed and mutual understanding enhanced.,
To ensure full discussion, individuals representing a wide range of political and economic points of view are
invited. Two-thirds of the participants come from Western Europe and the remainder from the United States
and Canada. Within this framework, on average about one-third are from government sector and the remaining
two-thirds from a variety of fields including finance, industry, labour, education and the media. Participants are
solely invited for their knowledge, experience and standing and with reference to the topics on the agenda.
All participants attend Bilderb_erg in a private and not in an official capacity.
Participants have agreed not to give interviews to the press during the meeting. In contacts with the news media
after the conference it is an established rule that no attribution should be made to individual participants of
what was discussed during the meeting.
There will be no press conference. A list of participants is appended.
~ e s m e , 25-27 April 1975
Inflation and its impact on society
For rny purpose I want to define inflation as a persistent and
more or. less substantial decline in the value of money. Changes in
the value of money are measured by changes in price index figures - or,
in other words, by changes in price levels - for these indicate the
change over time in the total amount of money paid for a certain basket
of goods. I do not propose to make a contribution to the more intricate
aspects of monetary theory. This would involve a discussion - for
instance - of changes in price levels which do not actually represent
changes in the value of money. Examples would include purely statistical
changes - thrown up by the method applied in computing the relevant
index figure - and price level changes caused by changes in the terms of
trade, either between sectors within one national economy or between
several national economies. None of these problems will be considered.
I shall, I regret to say, only concern myself with less subtle aspects.
That is why I have chosen a simple definition: a persistent and more or
less substantial decline in the value of money.
The use of money it possible to replace a necessarily
primitive economy based on barter by an efficient economy based on division
of labour. In our society, money has two functions of fundamental
importance. It serves as a unit of account and as a means of payment.
As a unit of account it enables the virtually infinite number of value
relationships between all economic goods produced to be reduced to a
straightforward pattern. allows all participants a clear view of the
economic process as a whole. In the economic universe, the uhit of account
is the one fixed point - the Archimedean point, one might say. Individual
prices may change; the unit of account, given normal circumstances, is
Sound money also serves as a means of payment. In that function,
money is the concrete representation of the abstract unit of account. In
an extremely inflationary environment, as in Germany during the years ._
following the First World War, the unit-of-account function is eroded first.
People base their calculations on other units (foreign currencies,
etc.). In this way the two functions tend to be severed. In a subsequent
stage, even the means-of-payment function may waste away. In that case
a money-using economy is gradually replaced by a (primitive) barter economy.

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Although in theory money is thus a neutral and efficient lubricant
to oil the wheels of a smoothly running economy, it may in practice become
an independent source of disturbances. Inflation.- which is our subject
today - is the most important of these disturbances. Money translates the
individual value relationships between goods and services, which may be
regarded as relative prices, into absolute prices. If the actual use of
money does not affect these relative prices, it will not affect the two
basic processes of the real economy - allocation of productive resources
and the distribution of factor income. The level of the absolute prices
is then irrelevant.
An economy in which money fulfils the described neutral function
with regard to the real economic processes is characterised by the
uninterrupted flow of the available Quantity of money through producer and
consumer households. The national income in money terms is generated during
the production of the national income in real terms and is simultaneously
and continuously spent by the income recipients. The procedure is not
unlike the blood circulation in the human body - an uninterrupted process
of distribution and collection. In this neutral situation, nowhere is
additional money pumped into the circular flow or part of the circulating
money siphoned off. The amount of money in circulation is sufficient - no
more and no less - to maintain production and consumption at the prevailing
price level. Only if expands owing to an increase in the
employed labour force or to a rise in productivity, or both, does a:.
corresponding amount of new money have to be injected into the economy
to avoid "anaemia".
Included in the circular flow is the savings and
investment circuit, by means of which economic units transfer sums from
the available money, through the existing money and capital flows, to
other units, who spend them. The government participates in the circular
process by levying taxes on the economic units and thus acquiring part
of the national product. An open economy is linked to the outside world
by the sluice gates of its balance of payments. It does make a fundamental
difference, however, whether the domestic and foreign circular flows are
linked through fixed exchange rates or through exchange rates determined
by free market forces - or any of the mixed systems one can think of.
Inflationary disturbances will occur if somewhere in this cycle
more money than specified above is injected. Additional demand, which does

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not derive from current production, is then created for goods and services.
This demand, however, cannot be satisfied in real terms; it is a case of
"too much money chasing too few goods". Room is forcibly created by price
rises, whereby a part of current production is bought up by those people
who, having injected extra money into the cycle, are in a position to exert
this extra demand (demand-pull inflation). The simplest form of inflation
is provided by a swelling flow of money and a rise in prices.
A somewhat deeper analysis is required for a clearer understanding
of this phenomenon .. What circumstances can in practice cause a money
stream autonomously to overflow its banks, and how is such a process initiated?
For the sake of simplicity, we shall begin by assuming a closed economy.
(1) The business community, encouraged by favourable profit
expectations, wants to invest more than its available savings. In
other words, as financing by way of the existing flow of income is
not possible, the business community turns to money-creating banks.
Money is then injected. The circular. flow has been disturbed, and
the effect on prices must be awaited. We have assumed an economy
with nearly full employment, because where there is less than full
employment the swelling flow of money will initially merely increase
production and employment before prices rise.
(2) The government is unable to meet its expenses completely from
taxation and loans and must therefore resort to
creation by the banks, by the central bank, or by both.
(3) A slightly more complicated situatio!J. occurs when a rise in the wage
level exceeds the increase in productivity. When these higher
wages can no longer be financed from the lowest possible level of
profits, firms will try to restore their profitability by raising
their prices (cost-push inflation).
However, this process can take place only when there is sufficient
monetary leeway. When this is not the case, or when any initial leeway has
been exhausted, the process must be halted on pain of firms getting into
financial difficulties, resulting eventually in stagnation in production
and employment. More attention will be given later to the special problems
which arise when wage and price increases, once they have reached a certain
size, become irreversible because the concomitant decline in productivity
and employment is considered unacceptable.
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One may wonder what actually has caused inflation in the foregoing
cases. Is it the propensity to invest, the political inability to raise
taxes or moderate expenditure, or the trade unions' insistent demand for
higher wages? The answer is not easy to find, as in each case the question
may be raised what causes are behind the immediate cause. However, all
three cases have one feature in common. They cannot arise or be maintained
without a growing flow of money. In this sense inflation in all its
variations is a monetary phenomenon. It could ahrays be prevented by
a restrictive monetary policy. It could always be terminated by adequately
slowing down the growth of the money supply. Whether this is possible, or
will meet with so many objections as to be unfeasible, is a problem that
will have to be discussed in more detail.
To the three causes that have already been analysed within the
supposedly closed economy, a fourth one may be added when taking into
account international relationships. A separate factor often mentioned
as a cause of inflation is the increase in prices of imported raw materials.
Some caution is required, however, in postulating that this fourth cause
is indeed an independent factor. The sharp rise in raw-material prices that
occurred before the oil crisis in late 1973 was the result of the expansionary
economic and monetary policies pursued in all major countries. After the
recession in 1970-71, which for the first time since World War II occurred
synchronously in all leading industrial countries, the policies
conducted set off an outright international boom, which did not fail to
affect raw-material prices .
This is a textbook example of demand-pull
inflation. It is largely to monetary expansion that one must point as
being the cause of it (just think of the market).
The steep increases in crude-oil prices in 1973 are a clear example
of price-setting by a monopolist confronted with an inelastic demand for
his product. This causes a change in the terms of trade between crude oil
and oil products on the one hand and all other products on the other hand.
Such a change need not necessarily lead to a further overall rise in prices,
provided the oil price increase is adequately absorbed by the policies
of the oil-consuming countries. In particular they should avoid awarding
wage increases to compensate for the specific rise in prices, which in each
of the oil-consuming countries is felt as a deterioration in the terms
of trade. If compensation is awarded, this may set in motion an overall
process of price inflation
but then we have case No. 3.
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Once an inflationary process has begun, no matter .what caused it,
it will have important consequences for the economy. Persistent and large-
scale inflation can even 4ave consequences in non-economic fields; it can
affect a society in all its aspects. To appreciate this fully it is
necessary to analyse inflation more closely. Perhaps this analysis will
help combat a dangerous proposition which undermines the will (and thus
also the ability) to fight inflation effectively: the proposition is that
inflation is admittedly troublesome and a nuisance but that "we must learn
to live with it". This attitude is sometimes reinforced by the argument
that no cure can ever be really effective because inflation is firmly rooted
in our modern welfare society. Inflation can, however, be analysed as to
causes and effects. Only such an analysis can teach us how inflation occurs,
where it leads, and what the ultimate cost is of not fighting it.
We can distinguish three stages in the inflationary process.
1) A relatively moderate. inflation, which is expected to pass.
The elasticity of inflationary expectations is less than 1.
Confidence in the unit of account has not been affected. It
is possible to speak of a "money illusion". Such a situation
exists when the rate of inflation is not higher than about
5%. A simple term for this stage is "creeping inflation".
2) Inflation gathers pace and it is diagnosed. People no
longer expect it to pass either wholly or even in part,
yet it is not expected to get worse. The elasticity of
inflationary expectations is 1. Although confidence in
the unit of account has been dented, it is not really
weakened. The upper boundary of this inflationary zone
might be set at 10%. One may speak of "marching inflation".
3) Inflation accelerates. People not only do not expect it
to disappear, they even expect it to intensify. Confidence
in the unit of account is fundamentally impaired,, The money
illusion has evaporated and symptoms of a flight into goods
are visible. The elasticity of inflationary expectations
exceeds 1. The rate of inflation is 10% or more. Here we
could speak of "galloping inflation".
~ ,
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To bring these zones somewhat better into focus we may not be
too far out in supposing, by way of example, that Germany is moving back
through the second zone and approaching the borderline with the first
zone; that the Netherlands is somewhere in the border region of the
second and the third zones and, hopefully, moving in the right
direction; and that the United Kingdom is in the third zone with the
border between the second and the .third far behind it.
Naturally, the borderlines indicated are only an attempt to
quantify the three danger zones. In qualitative terms, one might think
of the trouble involved in beating down inflation. Where it is still
relatively easy to cure creeping inflation, it already calls for
considerable endeavour to reverse marching inflation. But to fight and
defeat galloping inflation requires a supreme effort which can probably
only be made if broad sections of the community are convinced that the
cost of failure is infinitely higher than the cost of effective combat.
We may perceive what the cost of failure is by considering what galloping
inflation ultimately leads to. It is the hyper-inflation that Germany
experienced after the First World War. functions of existing money
as a unit of account and means of are wasting away and the economy
returns to the primitive level of a barter society. It needs no further
elaboration to see that such a situation involves economic chaos, social
hardship and political pnarchy. We need only consider that German
to have a graphic example ready at hand. In what follows I shall ind1cate
how these various dislocatidns develop when an inflationary economy moves
from one zone to the next.
The second zone provides an excellent opportunity for studying
in greater detail the paths along which accelerating inflation leads to
dislocation and derailment. For, at first sight, the situation in this
zone seems to have attained a measure of stability. People recognise
inflation as such. They expect it to continue at the same pace. and they
act accordingly - assisted probably by indexation. We also presume that
interest rates incorporate the existing rate of inflation which, on the
assumptions we adopted for this zone, is also the expected rate of inflation.
In principle, the economic process develops as if there were no inflation
at all. Under these circumstances, inflation in the second zone could
run a more or less quiet course and need not deteriorate into its third-zone
.. /..

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version, were it not for the fact that the stability is only apparent.
Present-day inflationary processes are dynamic and to a considerable degree
they are cumulative. Once started, inflation tends to keep itself going
and to accelerate of its own accord. It feeds on itself .
Why is this? At the beginning I gave a short analysis of the
possible causes of inflation, namely the business sector that invests
too much, public authoritieswho pursue inadequate fiscal policies, and
wage-earners who get pay rises that exceed the improvement in productivity,
all three cases conditioned by a growing money supply.
In practice these cases occur both simultaneously and consecutively,
and very often they show interaction. The present high wave of inflation
is a good example of such close intermingling of causes. As early as the
second half of the sixties, the first symptoms of distinctly inflationary
developments were visible. Most industrial countries pursued expansionary
fiscal and monetary policies; labour markets tended to become overheated;
and wage increases far exceeded the growth in productivity. All this led
to a combination of demand-pull and cost-push inflation that caused most-
of these countries to have reached; or even crossed, the boundary between
the first and second zones by the time the oil crisis -broke.. An additional
factor that stokes up the fires of inflation is the strong tendency in our
society towards ever higher taxation rates and social insurance contributions.
This causes a restriction of disposable incomes and acts as an additional
impetus for wage increases to exceed the growth in productivity.
It is, therefore, when the primary causes have lost their impact
and do not recur, that the inflationary process does not run a more or less
quiet course, as we just now assumed when we referred to the situation in
the second zone. If in a demand-pull inflationary environment cost-push
inflation sets in, this cost-push inflation shows a strong tendency to
accelerate and to continue even after the demand-pull inflation has been
stopped (mostly by restrictive monetary and fiscal policies). The cause
of this dynamic development is the interaction between wage and price
rises, an interaction that in turn is strongly influenced by wage-earners'
expectations, which are raised and disappointed in endless succession. On
the basis of expected price patterns they assume that the increment obtained
in money terms will be translated into a certain improvement in real terms.
When the increments are considerably in excess of the growth in productivity,
disappointment is inevitable because prices turn out to be rising more
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sharply than expected. The next wage increase will therefore be based
on expectations of a faster price rise, and so on. The process may
be reinforced by an increasing burden of taxes and social insurance
Pay rises that exceed the scope created by the improvement in
productivity are an intrinsic part of the dynamism of inflation. This
is obvious if we study the available statistics. In doing so, we should
compare the rise in,productivity- adjusted fOr changes in the terms of
trade - the rise in nominal wages per worker, adjusted by means
of the GNP deflator.
We have thus reached the situation where inflation is careering
ahead at full gallop. The third zone has replaced the second one. In
many industrial countries the course of events has actually been as
described. Although the higher oil prices were undoubtedly an extra
stimulus, we should not overlook the fact that they were not the underlying
cause. If, at the time of the oil crisis, inflation had been mild or
almost absent, the effects of the oil price rise might have been absorbed
without great effort. But the economic environment had alre.ady become
unstable and was no longer able to cushion the he,avy (This
observation relates to the consequences of the oil crisis for the rate
at which prices are The implications for international expenditure
and balance-of-payments equilibrium would take us to the issue of recycling,
for which I may refer to Annex.) The repercussions of such an intensive
cumulative inflationary development are severe. This holds for the economic,
the social and the political aspects, as already mentioned. I shall now
consider these aspects in some more detail.
It is obvious that the business sector is particularly sensitive
to the consequences of an inflationary process once it has started as
described. Profits are beginning to decline. Although in the first stages
inflation of the purely demand-pull variety may still be beneficial to
production and employment, the situation changes radically when it combines
with an accelerating cost-push inflation. Industry then reacts by
stepping up its investments aimed at substituting machines for relatively
expensive labour (expansion of capital-deepening investments). At the
same time, however, the propensity to invest for purposes of additional
productive capacity diminishes (contraction of capital-widening investments).
..... ,!
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Slowly but unmistakably a pernicious kind of unemployment appears.
Pernicious, because it cannot be cured by simply stimulating demand;
it requires a sufficient recovery of profitability, which is difficult
and time-consuming.
The problems meanwhile accumulate. Initially, investments
are financed from industry's own resources, loans floated in the capital
market and bank credit, but gradually financing runs into obstacles.
Funds for internal financing are eroded by the ever-rising wage costs;
suppliers to the capital market become more and more reserved. The
maturities of funds offered in the capital market tend to contract
(a clearly visible symptom of inflation), and banks reach the stage
of being fully loaned up. In short, industry is increasingly facing
problems of financing and liquidity.
Liquidity problems may be aggravated by existing taxation systems
that tax profits irrespective of whether they are real or only nominal.
But there is more to it than this. The erosion of prciifi ts and
the squeeze on liquidity are not evenly spread over the business community.
Labour-intensive sectors may be hit harder than ca pi tal-intensi ve ones.
Firms producing mainly for export are often affected in a different way
from those aiming generally at the domestic market. Firms will always
be differently placed, of course, even in a society with little or no
inflation; for instance, higher wages that may be acceptable in terms
of the average improvement in productivity measured nation-wide may be
awkward for specific sectorr. But within a-sound economic environment
such problems are absorbed and solved smoothly. The system is sufficiently
elastic to cushion and even out the pressures. Inflation at full gallop
is, however, too onerous. The normal relationships between the various
sectors of industry are impaired. Economic life disintegrates. People
begin to feel uncertain about the possibility for an economic system
based on market forces to continue - an uncertainty, moreover, that
is only too readily fostered by those who advocate a different social
order of which they may or may not have any clearly defined notions.
These economic developments have social consequences. It is
_obvious that receivers of fixed incomes are hit to the extent that their
incomes are not adjusted to higher prices. Many pensioners come into
this category. It is not surprising, therefore, that in such a situation
indexation is increasingly resorted to. This is not a way out, however,
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for those who derive their income from bonds. Difficulties may arise
if for one reason or another people have to sell securities, for many
bonds with a relatively low coupon will only sell at a substantial
loss, which may also be the case with shares. And there are still
other sources of uneasiness. Rightly or wrongly, there is a general
feeling of being counted out and of having to catch up with the others.
People are tormented by expectations that are first aroused and then
disappointed. They lose sight of their familiar landmarks. There is
a general feeling of being defrauded by invisible forces.
It needs little imagination to see that such a situation must
have political consequences. Firms in difficulty, the unemployed, all
those who are disappointed in their expectations - they all turn to
the Government.
Where is the Government?", is the catchphrase of the
day. It appears that the Government is everywhere, but, according to
the phrasemakers, with insufficient effect. A few examples of the
way in which the Government is approached: Firms in financial
distress ask for support. A multitude of facilities are devised for
'this purpose. Increasing numbers of firms, whole sectors even, are
leaning heavily on Government aid. The problems are not confined to
industry proper. Newspapers, political parties, churches of whatever
denomination, they all ask for subsidies. The private sector seeks
to pass its burdens on' to the Government. A classic phrase runs
"gouverner, c'est prevoir". Mendes France changed this into "gouverner,
c'est choisir". By now it seems as if it might perhaps be more apt
to say
gouverner, c 'est subventionner".
The Government is thus faced with a serious situation. Must
it insist on controlling those firms which it helps? Must it become
a substitute for a failing capital market and a loaned-up banking
system? Must it acquire shares in failing companies? How must all
this be financed? Higher taxes could have an adverse effect. There
is a risk that the economic system will move into a twilight zone, a
half-way house between a social order based on private enterprise and
a collectivistic economic system.
To summarise: inflation, in full gallop, causes disintegration
and arouses social resentment, undermining the proper working of the
political system and thereby threatening the very roots of democracy.
- 11 -
Inflation,as seen in the world of today, is the result of a number
of causes which - interacting - have made it dangerously explosive. This
analysis points to what must be done, in principle, to stop this development.
The prescribed therapy is closely related to the three inflationary
zones already described. Every inflationary pvocess, no matter what its
origin, is conditioned by a swelling flow of money, which in turn is made
possible either by money creation or by the activation of liquidity
accumulated in the past. (Money is created by the money-creating banking
system at the initiative of the business community or of the Government).
Thus every inflation can be prevented and stopped by a restrictive monetary
policy, even though the availability of "old" liquidity may mean that this
process will take some time because this "old" liquidity must be absorbed
before a policy of tight money can take effect. The economic and social
consequences and thus also the political repercussions will, however,
differ widely from zone to zone.
This is because wages in our society rise, but do not fall as they
did in the past. This is also true of the general price level (not, of
. course, of individual prices). Thus when a restrictive monetary policy
is applied in an attempt to prevent wages and prices from spiralling
further upwards, it means that the resulting volume of money will be too
small relative to the rising level of wages and prices, so that production
and employment are adversely affected. Symptoms of stagnation (stagflation,
slumpflation) become e ~ i d e n t . It is therefore of vital importance that
under these circumstances monetary policy should be complemented either
by a deliberate wage and ptice policy or by clearly defined measures to
influence wages and prices in a more general way. Enforcement by law should
not, however, be necessary. The same end can also be achieved through
consultations between the Government and the business community aimed at
voluntary restraint so as to deprive wage and price increases of the.ir
cumulative effects. The guideline is that, generally speaking, the nominal
wage increase deflated by the price increase should be in line with the
growth in productivity (adjusted, if necessary, for changes in the terms of
When inflation has progressed deep into zone (3) it is to be
feared that only a rigorous wage and price freeze can provide the breathing
space needed to fight inflation effectively.
- 12 -
We must realise fully that the forms of therapy mentioned must
deprive inflation not only of its impetus but also of its momentum. Not
only must the progression towards and within zone (3) be stopped, but
the return to zone (1) must be engineered. To put it briefly: in order
to break the impetus it will be necessary to change the ratio between
wage and price rises; to reduce the degree of inflation a parallel
reduction will be needed in wage and price rises. In all cases the
success of the therapy applied will depend also on the use of adequate
monetary and fiscal policies.
A few words should be added about the concrete situation in
many countries. Widespread structural unemployment does exist,
as we have already explained. Inflation has also resulted in endogenous
processes which have led to the classical downward trend in the trade
cycle. The policy which must be pursued must not only put a brake on
inflation, it must also stimulate the economy. This will need a very
careful mix of monetary and fiscal policies. Fiscal policy must provide
the stimulation, while monetary policy must ensure there is no
opportunity for inflation to raise its head again during this new period
of growth. The Government's borrowing requirements (substantially increased
because of the stimulative policies) must therefore be met by capital
market borrowing and not also by money creation. This is of great importance
for the United States 'especially. Fiscal policy is necessary to stimulate
the domestic economy and thyreby world economic conditions. Should the
United States. finance its qorrowing requirements by creating too much new
money, it might be wrong for the country_ itself and, because of the strategic
importance of the dollar, for the world as well. The seeds of a new inflation
might have been sown.
The possibilities of fighting inflation have been analysed above
in terms of the instruments of economic and financial policies. However,
the timely and effective use to which these instruments can be put is
determined by what is feasible politically. Alas, it must be said that
political inefficacy is a major barrier to fighting inflation
In this respect things have not improved since the thirties. At that time
politicians were unable to stop now in many countries they seem
to be to stop inflation. Of course, explanations can be found for
this impotence. There is a deep and widespread feeling of discontent
- 13 -
with the economic and social order in which we are living and this
means that the climate is unfavourable for governments to take the
necessary measures. Measures are too long delayed, inflation.proceeds
apace and what would have been relatively easy in zone (1) requires
a nearly superhumaneffort in zone (3).
Seen in this light, the fight against inflation is a major
political problem. It demands political leadership which is both able
and prepared to convince thepopulation that, however high the cost
of combating inflation effectively, the cost of not doing so will be
considerably higher. Ultimately the cost will be that the principles
of private enterprise. and of democratic gqyernment will not be able
to survive. It must be possible to make this plain to those who do
not desire a collective economy or advocate a political dictatorship.
Those who want these things will not wish to fight inflation, a "complete"
inflation being a bloodless revolution. It would be a good thing if
at this vital point there could be a parting of the ways. In that case
a fight against inflation might be effective - even in zone (3).
~ .

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